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Bankruptcy

Chapter 7 – “Liquidation”

Introduction

Chapter 7 is the form of bankruptcy that most people envision when they think about the bankruptcy process. Also known as “liquidation” or “straight bankruptcy,” Chapter 7 involves selling off a debtor’s non-exempt assets, if any, using the proceeds to pay creditors, and “discharging” the debtor from any further liability for most debts.

Eligibility

Who may file

You may file for Chapter 7 Bankruptcy if you are one of the following:

  • Individual;
  • Married Couple;
  • Corporation; or
  • Partnership.

Assuming you are an individual, married couple, corporation or partnership, the next question is whether you qualify under the means test instituted by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

The Means Test: a 3 Step Inquiry

STEP 1:

The means test determines your eligibility for filing under Chapter 7 by first comparing your household income to the median household income (http://www.usdoj.gov/ust/eo/bapcpa/20080101/bci_data/median_income_table.htm) for families of the same size in the state in which you live. These amounts are determined by the United States Census Bureau.

If your household income, which is your average income for the preceding 6 months, is less than the applicable median income amount for your state, STOP! You automatically qualify to file Chapter 7.

For example, recent 2016 median income amounts for Illinois families are as follows:

  • Single Person $49,741
  • 2-Person Family $63,896
  • 3-Person Family $72,429
  • 4-Person Family $86,921

STEP 2:

If your income is greater than the median income for your state, an additional test must be performed to determine whether you will be able to file Chapter 7 or whether you must instead file Chapter 13. This additional test looks at your disposable income to determine how much you could pay to creditors every month.

Your disposable income is calculated by taking your average monthly income over the last 6 months and subtracting your average monthly expenses which are based on national and local standard expenses set by the Internal Revenue Service. Once your disposable income is calculated, you multiply that number by 60 to determine the total amount that you could pay over a 5 year period. If the amount is less than $6,000, STOP! You are eligible to file for Chapter 7. If the amount is more than $10,000, you must file under Chapter 13. If the amount is more than $6,000, but less than $10,000, then you must complete the 3rd and final step to determine which chapter will apply to you.

STEP 3:

The third and final step compares the total amount that you could pay over the 5 year period against the total amount of your non-priority, unsecured debt (“NPUD”). If the total 5-year payout is less than 25% of your NPUD, you may still be able to file for Chapter 7. However, if it is greater than 25%, you must file under Chapter 13.

For example, assume that in STEP 2 you calculated that you could pay $8,000 over a 5 year period and that your total NPUD was $40,000. Because the 5-year payout is only 20% (8,000/40,000) of your NPUD, you will most likely be able to file for Chapter 7. However, if your NPUD was only $30,000, your 5-year payout would be 26.7% (8,000/30,000), and you would be required to file under Chapter 13.

The Chapter 7 Bankruptcy Process

Filing

Following the completion of an initial debtor’s education course, the first of two credit counseling requirements imposed by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the Chapter 7 Bankruptcy will begin with the filing of the Petition, the Statement of Financial Affairs, and a myriad of other forms detailing a debtor’s assets and liabilities as well as income and expenses. The purpose of these forms is to identify the “bankruptcy estate” (i.e. the amount of assets available to creditors) so that the bankruptcy trustee will be alerted to the presence and amount of assets available for distribution to creditors. Most Chapter 7 cases are “no asset” cases in that a debtor’s assets are either shielded by various exemptions or are otherwise not technically a part of the bankruptcy estate, and are therefore not available to creditors (i.e. retirement plans). However, if there are non-exempt assets worth more than a nominal amount, the trustee will seize these assets and use them to pay creditors as well as the expenses of the case administration.

Note that the filing of these forms triggers an “automatic stay,” meaning that your creditors must stop contacting you or trying to collect on your debt, including ceasing all foreclosure, repossession or eviction actions. If your creditors do contact you after learning that you have filed for bankruptcy, they can be held liable in civil proceedings for twice the amount of debt they are owed plus attorneys’ fees.

The Creditors’ Meeting

Within 3 to 6 weeks after filing for bankruptcy, you will be required to attend the Creditors’ Meeting at which you will meet with the bankruptcy trustee. This is a very informal meeting where the bankruptcy trustee will ask you questions about your petition which you must answer under oath. In addition to the trustee, your creditors also have the right to attend this meeting and to ask you questions. In practice however, creditors rarely attend.

Following the Creditors’ Meeting, you will have 45 days to complete the second of the two debtor’s education course requirements discussed above. The completion of this course is a requirement for discharge, and if you do not submit a certificate of completion, your case will be dismissed. You will then be charged an additional filing fee to reopen.

Your creditors will have 60 days after the Creditors’ Meeting to object to the allowance of your bankruptcy or to the allowance of the discharge of one or more particular debts. Assuming no objection is made, the bankruptcy court will issue a discharge order once the 60 days has passed.

During this time, or possibly even before the Meeting, you will have to file a Statement of Intention where you may decide to “reaffirm” certain debts. Reaffirmation means that you agree, despite having no obligation to do so, to remain liable to one or more creditors even though your debt is eligible to be discharged. For example, you might negotiate new terms with a particular credit card in exchange for reaffirming your debt to the company.

Discharge

Once the 60 day period for creditor objections has passed, the bankruptcy court will issue an order of discharge releasing you from liability for all dischargeable debts that existed when the case was first opened, but not debts incurred while your case was pending.

Non-dischargeable debts will survive the bankruptcy proceeding, and you will be responsible for paying those debts just as if you had not filed the bankruptcy. Likewise, you will be responsible for paying any debts that you choose to reaffirm.

Dischargeable & Non-Dischargeable Debts Under Chapter 7.  A bankruptcy discharge under Chapter 7 WILL erase the following debts:

  • Credit Cards;
  • Mortgage on a home if the home is surrendered;
  • Car loans if the car is surrendered;
  • Loans which were personally guaranteed;
  • Judgments rendered by a civil court;
  • Business debts; and
  • Taxes incurred prior to the 3 year period immediately preceding the filing of the bankruptcy or taxes which were NOT assessed within the 240 days preceding the filing of the bankruptcy;

But the following debts WILL NOT be discharged:

  • Majority of student loans;
  • Child support & alimony;
  • Recent taxes and taxes for years for which no return was filed;
  • Debts for certain purchases or cash advances incurred shortly before the bankruptcy was filed;
  • Government imposed fines or penalties;
  • Debts incurred through fraud which are successfully challenged by creditors;
  • Judgments incurred in criminal court and based on fraud;
  • Debts for willful or malicious injury which are successfully challenged by creditors;
  • Debts for restitution;
  • Post-Petition condominium or cooperative association fees; and
  • Some of the debt that you don’t bring to the attention of the bankruptcy court and trustee.

 

 

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